Chinese markets sag but more pain to come

Stephen Innes Head of Trading OANDA Asia Pacific discusses his views on China with Victor Ferreira from Canada’s Financial Post

North American stock markets weren’t the only ones to feel the pain this week: China’s main index dipped nearly eight per cent as the country’s markets continue to endure a painful, months-long decline not seen since 2014.

Since hitting their peaks in January, China’s indexes have been decimated. The Shanghai Composite Index is down 27 per cent and hit a new low for the year on Thursday, while the tech-heavy Shenzhen Composite Index has fallen even further and is down 35 per cent since its peak.

The stunning losses have resulted in China becoming home to the world’s worst equities market.

“It’s really going to drag out here,” said Stephen Innes, head of trading in Asia-Pacific for Oanda. “I think there’s a lot of pain in the China trade over the next six months to a year.”

The Chinese markets are volatile, he said, and have been at risk as the country moves “away from brick and mortar to a more services- and demand-driven economy.”

Eighty per cent of the Shanghai exchange is dominated by retail and individual stock traders, Innes said. Their speculative approach, which involves heavy doses of short selling, often results in the exchange operating “like a gambling casino.” Even after the rout, investors “are still piling money in” and “remain unfazed.”

Beyond the tariffs, China has been accused by the U.S. of being a currency manipulator and of tech-related spying. All it takes is one ill-timed comment from Trump to see the markets slump, Innes said.

“He can move from calling the Fed crazy to saying something is ‘loco’ for the U.S. Treasury and, boy, we’ll be down in a heartbeat,” Innes said.

On Friday, the Shanghai exchange appeared to slightly rebound — by less than one per cent.

The gains come on the heels of the Fed announcing Thursday that it did not consider China to be a currency manipulator. The sentiment is still sour on Beijing, Innes said, but tech companies may prove to be good options for investors with long-term mindsets because many are in oversold territory.

“The whole Chinese e-commerce sector is as sure of a can’t-miss as you can get in the market,” he said.